Decisioning platforms can springboard ESG in financial services

Matt Cox, Vice President, FICO looks at how businesses need to back up ESG credentials with flexible systems that enable rapid ingestion of data sets

 

The implementation of ESG measures in the UK and across the world faced challenges last year, but that did not stop organizations hijacking the title and splashing it across their propositions in an attempt to market themselves in a positive light.

It’s clear why this happens. For example, in a world where there’s a significant skills gap, environmental and social considerations can be a decider between a prospective employee accepting or rejecting an offer. Customer choice and loyalty can also be swayed by ESG credentials. At the same time, the spreading of disclosure requirements is driving investors in shaping organizations’ attitude to strategically embrace a sustainable profile. However, most recent reports highlight how only 5% of European firms have credible decarbonization plans in place.[i] Over-inflated claims have developed to the point where the FCA set out new rules to establish the UK as a leader in anti-greenwashing[ii]. The rules target exaggerated or misleading claims around environmental credentials.

Decisioning platforms to propel ESG efforts

In financial services, much of the ESG agenda today is delivered at the corporate level and will address subjects like where the bank invests. While ESG strategic commitments and policy frameworks have been fine-tuned at that level, and new type of sustainable finance products have been brought to market, much work is still needed to connect and optimise the operating framework in between. The latest CDP – Oliver Wyman report shows that, with respect to transition to a low-carbon economy (a subset of ESG), 70-80% of organizations are still lacking a sound governance structure to execute their strategic commitments.[iii]

Forecasts show that while 2022 was a difficult year for ESG efforts, a change is coming and there will be an increased focus on bringing ESG insight into more granular lending and investment decisions. This will include:

  • Implementing policies and decision-making criteria in line with specific environmental objectives.

Integrating environmental objectives into customer engagement strategies to support and encourage the sustainability transition of clients, in order to reduce indirect emissions (those coming from the business model and external stakeholders rather than internal operations).

This will trigger a need for flexible decisioning platforms that allow new data sets to be quickly loaded and assessed.

Many leading banks now have active climate change programmes and begun equipping themselves with tactical toolkits. This isn’t a side project for them, it’s integral to their mission. And it’s made possible in part by digital transformation projects.

An environmentally focused organization is also important to the next wave of customers, where more than 50% of them is already expecting to embrace a sustainability-conscious lifestyle[iv]. Today’s youth will not bank with any organization that cannot handle all their needs digitally and showcase the right sustainability credentials. Your future customers are paying attention. Financial institutions will need to adapt to better serve the environment in the years ahead and they need to consider what tools they will use to fulfil those plans.

For ESG programmes to hit their targets and make a difference where it is needed, there must be increased innovation in the use of alternative data across all kinds of lending. This data will include everything from satellite-driven CO2 emission detections (needed to assess and report on indirect, financed emissions) to assessing the changing number of rainy days across regions to the effect of changing behaviour of climate systems (in order to assess and model the risk of physical climate risks affecting both their own facilities and portfolio assets). While such dara are needed for disclosure, they can also be factored into the management of customer relationships, potentially affecting onboarding, pricing, marketing or advisory engagements.

As a result, organisations will increasingly need flexible data (adding more than 500 data points to traditional analysis) and decisioning platforms that enable these new data sets to be ingested, assessed rapidly for their validity and then deployed into decision-making processes.

We have seen banks rushing to cover immediate needs, for example assessing the policy alignment of properties backing mortgages or the ESG profiles of specific firms. But standalone and partial views, rarely built internally, of ESG-related risks harms the proper understanding and management of those integrated risk metrics that financial institutions are required to disclose, explain and address in their business model.

Using decision technology to address environmental issues

It’s difficult to associate debt collection with saving the planet. But one of FICO’s European customers, Hoist Finance is making that connection. Hoist used to manage customers using 14 different systems. Now they use one – FICO Platform.

Hoist have massively digitized their operations as a result, and have calculated that they save 442 tons of carbon for each 10% of customers using the automated process. This reduces the organization’s carbon footprint for every digital resolution by 97%.

In addition to cases like this where financial services firms are directly addressing their carbon footprint, there are also opportunities for banks to support their business customers’ sustainability journeys. It is helpful, therefore, to see how firms operating in various sectors such as logistics and renewable energy are using decision technology to reach ESG goals.

Mexico’s Traxión, the leading mobility and logistics company in Mexico, has used FICO route optimization technology to help it use fewer vehicles, save on fuel costs, cut emissions and reduce fleet wear and tear. The company has already saved 2.9 million kilometres in travel, USD$725,000 in costs and 458 metric tons of emissions after implementing just 11% of the optimal solution. Traxión is on track to reduce empty trips by 20 percent which will save it more than 10 million kilometres, USD$2.5M in costs and an impressive 1,580 metric tons of emissions once its operations are fully optimized.

Denmark’s Ørsted, the world’s leading offshore wind farm developer, has used FICO® Xpress Optimization to develop a novel digital solution for designing an important part of their wind farms. This has enabled the Danish company, which has 30 wind farms in operation or under construction, to achieve significant savings while reducing overall design time and improving its ability to investigate different scenarios. This allows Ørsted to roll out wind farms faster than they could before.

Playing a role in implementing ESG-focused principles is about more than just keeping up with legislation. It is essential to evoke a sense of responsibility as change needs to happen quickly; ESG ties everyone together.

 

[i] https://www.oliverwyman.com/content/dam/oliver-wyman/v2/publications/2023/feb/cdp-europe-report.pdf
[ii] https://www.cityam.com/fcas-new-sustainability-rules-to-establish-uk-as-world-leader-on-anti-greenwashing/
[iii] https://www.oliverwyman.com/content/dam/oliver-wyman/v2/publications/2023/feb/cdp-europe-report.pdf
[iv] https://www.simon-kucher.com/sites/default/files/studies/Simon-Kucher_Global_Sustainability_Study_2021.pdf
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